Madras High Court on SEBI Circular for Scheme of Arrangement

A few months
ago, I had discussed SEBI’s circular
of February 4, 2013, which imposes more stringent oversight by SEBI and the
stock exchanges on different types of schemes of arrangement.

Shortly
thereafter, our guest contributor Yogesh Chande has pointed
to issues relating to the scope of the SEBI circular, and specifically
whether the circular applies only to such schemes that require exemption from
Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957 (SCRR), which
principally relates to reverse listings, or whether it applies more widely to
all types of arrangements. This ambiguity is caused because although the SEBI
circular applies generally to all types of schemes, including schemes among
listed companies and even capital reductions under section 100 of the Companies
Act, the genesis for the circular can be related to a 2009 circular which is
confined to reverse listings and was also repealed by the February 2013
circular.

In an
unreported judgment dated April 1, 2013, the Madras High Court holds that
SEBI’s circular is applicable only where an exemption is being sought from Rule
19 of the SCRR and not for other schemes. That case involved a merger of two
companies both of which were listed on the stock exchanges. The companies made
an application to the court for convening meetings under section 391 of the
Companies Act. Since this was not a reverse listing, the court clarified in
response that the SEBI circular is not applicable. The relevant portion
containing the discussion on the point of law on the issue is extracted below:

5. The
learned counsel for the applicant contended that the conditions laid down by
the Securities and Exchange Board of India vide circular CIR/CFD/DIL/5/2013
dated 04.02.2013 are not applicable to the case of the applicant, as the
applicant is not seeking exemption under Rule 19(7) of the Securities Contracts
(Regulation) Rules, 1957, as the transferor company listed its shares in the
recognised Stock Exchange after complying with the conditions laid down under
the Securities Contracts (Regulation) Rules, 1957.

6. On
consideration, I find force in this contention. Rule 19 of the Securities
Contracts (Regulation) Rules, 1957 stipulates that a public company as defined
under the Companies Act, 1956, desirous of getting securities listed with the
recognised Stock Exchange are required to apply for the purpose to the Stock
Exchange along with its application, document contained under the Rule.

7. A
submitted by the learned counsel for the applicant, this already stood complied
with, when the stock was listed with the recognised Stock Exchange.

8. The
learned counsel for the applicant is also right that Rule 19(7) gives right to
the Securities Exchange Board to waive or relax strict enforcement of any of
the rules. In the present case, it is not a case where the applicant is to get
the stock listed. In the case in hand, what is being done is that the stock
which is already listed is being regulated without seeking any exemption,
therefore, for the purpose of amalgamation of the companies, the provisions of
Rule 19(7) would not be applicable, as no exemption under the rules is being
sought therefore, the circular issued in exercise of power under Rule 19(7)
will not be applicable to the applicant.

The court has
adopted a narrow view of the circular. While it is understandable that the
circular refers to Rule 19(7), that does not explain the wider objective of
SEBI that is evident in the circular and also in the fact that it covers other
schemes of the arrangement such as capital reduction that does not involve any
listing of securities without following the usual disclosure process.

As Yogesh mentions in
his post, there is some ambiguity regarding the scope of the circular, and this
decision also underscores the type of issues that could arise in practice.
Given this ambiguity, it is recommended that SEBI expressly state its intention
regarding the scope of the circular. By issuing a clarification or a set of
FAQs, possible uncertainties regarding the schemes of arrangement, which are a
popular form of a transaction in India, can be avoided.

Update – May 22, 2013: SEBI has since clarified that the circular is applicable to all types of schemes of arrangement and not only those that require an exemption under Rule 19(7).

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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